Report: Offshoring’s Cost Advantage Slips

The cost advantage of offshoring declined in 2006, found the Global Services Location Index released by A.T. Kearney, a Washington-based global consulting firm.

The report found that although the wage advantage of offshoring locations for office services is set to last for another 20 years, it is on the decline as offshore wages for IT, business process and call center services have risen. But even under the most aggressive projections of wage inflation and currency appreciation, however, offshore locations will still have the price advantage for the foreseeable future, found the report.

The changes in labor cost are the result of both accelerating wages and currency appreciation in offshore hot spots as well as downward pressure on wages in impacted sectors in developed countries, according to the report. Still, markets are keeping up their competitiveness by continually improving their talent, experience, certifications and regulations.

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“What is most striking about the results of this year’s Global Services Location Index is how the relative cost advantage of the leading offshore destinations declined almost universally, while their scores for people skills and business environment rose significantly,” said Paul Laudicina, managing officer and chairman of A.T. Kearney.

“These findings reinforce the message that corporations making global location decisions should focus less on short-term cost considerations and more on long-term projections of talent supply and operating conditions.”

The report found that even as the cost-saving appeal in offshore hot spots may be declining, the competition is intensifying. Nevertheless, “on-shore” and “near-shore” locations in developed countries fell in rankings, although their absolute scores improved.

“While total compensation costs for sample positions like IT programmers or call center representatives rose by 5-10 percent in most developed countries, average wages for similar positions in India, China, the Philippines and parts of Eastern Europe and Latin America grew anywhere from 20 percent to 40 percent,” said Martin Walker, senior director the Global Business Policy Council at A.T. Kearney.

Walker said that, at the same time, he has seen telecom costs in many emerging markets drop by 25 percent or more as competition and volumes in the telecom market increase. He also said he saw double-digit growth in university enrollment in countries like China, Brazil and Egypt, and the number of firms with quality endorsements like Carnegie Mellon’s CMMI certification and the ISO 27001 data-security certification almost doubled in several emerging markets.

Click here to read about how IT services jobs are taking the biggest offshoring hit.

For the 2006 report, the Index added 10 new countries that had established themselves as remote services locations: three Baltic States and the Ukraine in Eastern Europe; Sri Lanka and Pakistan in South Asia; Uruguay in Latin America; and Morocco, Senegal and Mauritius, all francophone locations.

India and China continued to take first and second places as globally located service providers by a wide margin. Declines in cost advantage were offset by further improvements in talent supply and business environment, found the report.

Southeast Asian countries including Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam remaining primary alternatives to India and China. All six of these countries made it into the top 20 locations.

Contenders in Central and Eastern Europe such as Bulgaria, Slovakia and the Baltic States increasingly outshined more established players such as the Czech Republic, Hungary and Poland.

In the Middle East and Africa, Egypt, Jordan, the United Arab Emirates, Tunisia, Ghana, South Africa, Israel and Turkey all improved or maintained their rankings. Maurituis, Morocco and Senegal made their first debut.

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